Exchange publishes new guidance for issuers facing allegations of fraud, material accounting or corporate governance irregularities

The Stock Exchange of Hong Kong Limited (“Exchange”) noted that in recent years some listed issuers have, from time to time, become subject to market commentaries or rumours with allegations of fraud, material accounting or corporate governance irregularities (together, “allegations”). These allegations have caused or could have caused intense price pressure in the issuer’s listed securities. 

On 8 April 2016, the Exchange published a new guidance letter HKEX-GL87-16 outlining its revised approach in handling issuers subject to these allegations. Set out below are the salient points of the guidance:

1. What actions should an issuer take when it is subject to allegations?

If the allegations have, or are likely to have, an effect on the issuer’s share price such that, in the view of the Exchange, there is or there is likely to be a false or disorderly market in the issuer’s listed securities, the issuer must:

• make a clarification announcement promptly; or
• if it cannot promptly publish the clarification announcement, apply for a trading halt and ensure trading resume as soon as practicable following publication of a clarification announcement.  Issuers should refer to the guidance letter HKEX-GL83-15 for principles and best practices in applying for trading halts.

2. What should be disclosed in a clarification announcement? Will the Exchange pre-vet the announcement?

The clarification announcement should:

• make reference to the allegations;
• inform the market about the issuer’s position regarding each allegation;
• to the extent possible, contain particulars to address, or to refute, the allegations;
• disclose any inside information required to be disclosed under Part XIVA of the Securities and Futures Ordinance where applicable, or an appropriate negative statement.

The Exchange would not normally pre-vet the clarification announcement.

3. What actions will the Exchange take following the publication of a clarification announcement?

If the Exchange believes that the clarification announcement would not address the concerns on false or disorderly market, it may require the issuer to provide further information and halt trading pending further clarification. This may be the case where, for example, the clarification announcement contains information materially inconsistent with its other published documents, or contains information which creates market confusion so as to raise the Exchange’s concerns about the possible development of a false or disorderly market in the trading of the shares.

The Exchange may continue to follow up with the issuer on any further disclosures, reviews or investigations it considers necessary on matters that have arisen out of the allegations. Depending on the nature, gravity and creditability of the allegations, the Exchange may require the issuer to:

• provide further information to support its denials of allegations; and
• review or conduct investigations into the claims and documents purportedly reviewed or used to support the allegations.

The Exchange takes follow up action to require an issuer to demonstrate that its responses to allegations are supported and the basis for that support and that it has in place internal controls and risk management measures to safeguard its assets, and financial and reporting controls to promote reporting that is timely and materially accurate. Where appropriate, the issuer is expected to identify and correct any weaknesses in its internal controls, and adopt good corporate governance practices to address the inconsistent information identified in the allegations.

4. Will the Exchange’s follow up action affect the trading of the issuer’s securities?

In the absence of a material development that raises concerns about trading in an orderly manner, the Exchange’s follow up action should normally not affect the trading of the issuer’s securities.  

However, if the follow up action reveals that any issuer announcement or document was materially inaccurate or misleading, or that there are serious concerns about the issuer’s compliance with the Listing Rules, the Exchange may suspend the issuer’s share trading pending further clarification. Where appropriate, the Exchange may make a referral to an appropriate law enforcement agency (e.g. the Securities and Futures Commission) for consideration of action under the law.